Management segregates duties among staff in order to reduce the risk of fraud

The Fraud Triangle model posits that for fraud to occur, three elements must be present: pressure, opportunity, and rationalization. Segregation of duties is a fundamental internal control activity designed to remove or reduce the ability of a single individual to both perpetrate and conceal fraudulent acts in the normal course of their duties. By separating authorization, custody, and record-keeping functions, management directly limits the circumstances that would allow fraud to be committed, thereby targeting the 'opportunity' component of the fraud triangle.

A. pressure: This refers to an individual's motivation or incentive to commit fraud (e.g., financial hardship). Segregating duties does not alter an employee's personal pressures.

C. rationalization: This is the psychological justification an individual uses to make their fraudulent behavior seem acceptable. This internal mindset is not affected by process controls like segregation of duties.

D. detection: While proper segregation of duties increases the likelihood of detection, 'detection' is a result of the control, not a component of the fraud triangle itself. The control's primary aim is to prevent the opportunity.

1. U.S. Government Accountability Office (GAO). (2014). Standards for Internal Control in the Federal Government (GAO-14-704G, "Green Book"). Washington, D.C. In the discussion of Principle 10: Design Control Activities, section 10.12 explicitly states, "Segregation of duties helps prevent one individual from controlling all key aspects of a transaction or event... This reduces the risk of fraud... by not providing any one individual the opportunity to control all key aspects."

2. Committee of Sponsoring Organizations of the Treadway Commission (COSO). (2016). Fraud Risk Management Guide. The guide's executive summary and core principles are built on the concept that internal controls are the primary mechanism for addressing the "opportunity" element of the fraud triangle. Principle 4, "The organization selects, develops, and deploys preventive and detective fraud control activities," directly links controls to mitigating fraud risks by reducing opportunity.

3. Cressey, D. R. (1973). Other People's Money: A Study in the Social Psychology of Embezzlement. Montclair, NJ: Patterson Smith. This foundational academic work introduced the fraud triangle. Cressey identified "perceived opportunity" as a necessary condition for fraud, which he defined as both the general information and technical skill to commit the act and the ability to avoid detection. Internal controls like segregation of duties are designed to eliminate this perceived opportunity.